Blockbuster is closing a fifth of its U.S. stores. The video's largest DVD rental service is gearing up for a hard stand against rapidly advancing competitors, Netflix and Redbox. (Source: Norwood News)

Part of Blockbuster's fall has been due to the rise of Redbox, a kiosk rental service that has seized close to a sixth of the U.S. DVD rental market. The service's 18,000 kiosks offer 1-day DVD rentals at the bargain bin price of $1. (Source: Rainy Day News)

Rental outlets are being killed by online content, vending machines, and mail rentals

Video juggernaut Blockbuster, long
outmaneuvered and outsold competitors. But the industry giant
rocked the rental industry last week, when it announced that it would
be closing
960 of its 5,000 U.S. stores. Overnight Blockbuster, which
also maintains 3,300 international stores, fell from a industry icon
to a victim of a changing market in the minds of many. The
writing, however, has been on
the wall for some time now.

Blockbuster is also changing
some stores over to used DVD outlets. In total its filing
stated that as many as 1,335 to 1,560, mostly in the U.S. will close
or be changed.

Blockbuster did get some good news.
Sources indicated Friday that it managed to raise
more money that it had hoped for in a private debt offering.
The company, with the help of J.P. Morgan Chase, managed to secure
$675M USD, when it only had expected $340M USD. With those
assets Blockbuster will be able to both pay off its $572M USD in
maturing debt and carry out plans to open 2,000 rental kiosks by the
end of the year, followed by a planned 7,500 more in 2010.

In
the end, Blockbuster is still the market's biggest player, but it
faces the danger of falling behind two leading competitors -- Redbox
and Netflix -- as the market shifts. Barry McCarthy, CFO of
Netflix applauded
his competitor's decision saying it was a smart move. He
stated, "Blockbuster has been battling a headwind trying to
right-size their capital structure. And it looks like they have
made some important strides in making that happen. So congratulations
for them."

Netflix, meanwhile continues to charge
ahead. The company is up to over 11 million subscribers and
is forecasting third quarter earnings of $419M USD, up 23 percent
from a year before.

Also enjoying new success is Redbox,
a vending machine-style rental service that offers 1-day video
rentals for $1 (customers pay $1/day for each additional day they rent it). The company now has over 18,000 active kiosks,
a 13.8 percent marketshare, and $344M USD in profit for the first two
quarters of the year.

Some studios -- Universal, Fox,
and Warner Brothers -- are fighting the service, refusing to enter
new-release distribution contracts with it for fear that its low
prices will undercut their profits. Redbox is suing them, and
meanwhile is buying DVDs through retail channels to provide key new
releases. The company says this hiccup will do little to stop
it, and that it expects sales to double by the end of the
year.

Blockbuster's increased online presence can certainly
combat Netflix, and its 10,000 kiosks will provide some challenge to
Redbox. But as it comes late to both of these games, the
question remains whether it will be able to outcompete the younger
rivals that currently dominate them. Being king of chain video
certainly brings Blockbuster much profit for the time being, but as
the industry increasingly shifts towards mail rentals and vending,
its ability to compete in these markets will be critical.

Other
factors will play a critical impact on the future of the video
distribution industry. Executives at Google-owned YouTube are
rumored
to be in talks with executives from Lions Gate, Sony,
Metro-Goldwyn-Mayer and Warner Bros over a distribution scheme that
would stream $3.99 DVD-quality rentals over the video sharing
service. ITunes and Amazon already offering growing rental
schemes. And free video may be the greatest threat of all, with
sites like Hulu using advertising revenue to pay for a plethora of
streamed
TV shows and select movies.

The Blockbuster shaking up is
only the latest in this fast evolving market. Rental video
stores are slowly riding into the sunset, but clinging to part of the
market. They still lead the market and won't disappear
overnight, but streamed rentals, kiosks, mail rentals, and free
advertising-driven content seem poised to eventually eclipse the
tried-and-true format.

"It looks like the iPhone 4 might be their Vista, and I'm okay with that." -- Microsoft COO Kevin Turner